Keeping dairy on level terms

Prime Minister John Key and Xi Jinping are looking to advance New Zealand's free trade agreement.

Our dairy farmers should be heartened at the promise John Key extracted from Xi Jinping to move swiftly to upgrade New Zealand's free trade agreement with China.

It was one of the major takeouts from last week's visit to New Zealand by the Chinese President. And, in Key's view, the standout from the visit.

Key wanted the FTA upgraded to ensure New Zealand does not have to combat any new advantages Australia may have secured for its dairy sector in its own free trade deal, which was announced on Monday last week after close to a decade of negotiations.

The Australian deal -- or CHAfta as it is known -- provides plenty of upside for Aussie dairy farmers including greater access to the Chinese infant formula market. New Zealand has had the advantage until now through the winding out of tariffs on infant formula products down to zero. This has proceeded at a much swifter clip than the windout of the tariffs on milk powder and other dairy-related products which are due to go to zero in 2019.

The full detail of the CHAfta is yet to be unveiled. There is still considerable work to do on the detailed text. Former NZ trade negotiators have told us for instance there is doubt over whether the Australian deal does really exempt its dairy products from export safeguards in the Chinese market. And discretionary safeguard does apply with whole milk powder.

China wanted the safeguards to protect its dairy farmers from large import supply surges. They have been exercised with tariffs of 10 per cent being applied to NZ export product.

Key reckons the fact NZ, via Fonterra, has about 20 per cent of the Australia dairy sector places the company in good stead.

But it is notable that Fonterra will face stronger competition in Australia as Chinese companies spread their footprint through acquiring farmland -- particularly in Tasmania which has higher rainfall -- and take an increased stake of the processing sector.

One of the analysts we follow -- Sean Keane of Triple T Consulting -- highlighted the fact the Australians will be looking to close the milk production gap with New Zealand in coming years.

"Ideally, it will happen because they grow faster in exporting product, rather than New Zealand sees its own market volume eroded by Australian producers."

Keane went on to note that market growth forecasts should allow for both countries to continue doing very well.

"Fonterra's current milk production is running at 18 billion litres per annum, of which 1.5 billion is actually produced in Australia. The company's current growth plan has that number rising to 30 billion litres by 2025. Effectively, the battle therefore should be for the additional market share that is expected to come on line, rather than being a war for existing contracts, though no doubt the competition there will be good for Chinese consumers."

NZ's trade negotiators made sure our 2008 bilateral agreement contained a clause which means if China signs a more preferential deal with another country then it must offer the same conditions to New Zealand.

The ratchet clause is being exercised with Key deputing Trade Minister Tim Groser to join his Chinese counterpart to move the NZFTA to the next level.